Quarter-Point Rate Hike Expected at ECB Meeting, Slow to Start Cutting Rates
A quarter-point rate hike is all-but a done deal when the European Central Bank (ECB) meets next Thursday, according to leading consultancy firm Capital Economics. While some economists have speculated that the July rate rise could be the last, Capital Economics predicts that the ECB will sanction rate increases at both the July and September meetings. However, they believe the central bank will be slow to start cutting rates and will keep its deposit rate around 4% until the second half of next year before loosening policy.
Andrew Kenningham, chief Europe economist at Capital Economics, highlighted that the details of the latest eurozone inflation reading will do little to settle the ECB. He stated that the breakdown of inflation data is not particularly reassuring, with core goods inflation decreasing while services inflation rises. This aligns with their view that global price pressures would ease, but domestic pressures would persist. Kenningham concluded that there is not much in the data to reassure the governing council.
Capital Economics also stated that the outlook for the eurozone remains largely unchanged. Revised data showed that the eurozone avoided a winter recession, with the economy stagnating at the start of this year instead of shrinking as previously thought. Eurostat reported that output was flat in the first three months of the year, an improvement from the prior reading of a 0.1% fall. This revision, combined with a decline of the same magnitude at the end of 2022, had initially suggested the first six-month contraction since the COVID-19 pandemic.
Jamie Rush, chief European economist at Bloomberg, commented on the current economic situation, saying, “As the impact of the energy shock passes, it is giving way to a squeeze from tight monetary policy. That’ll keep growth slow for the rest of the year.”
In conclusion, while a quarter-point rate hike is expected at the upcoming ECB meeting, Capital Economics predicts that the central bank will be cautious in starting to cut rates. The latest eurozone inflation reading provides little reassurance, with core goods inflation decreasing and services inflation rising. The outlook for the eurozone remains largely unchanged, with the economy avoiding a winter recession. However, slow growth is expected for the rest of the year due to the impact of the energy shock and tight monetary policy.